2016 Budget: National Treasury responses & further clarification

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Finance Standing Committee

04 March 2016
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The National Treasurer gave responses questions raised at public hearings, and provided further clarifications on the budget. He noted that the Office of the National Treasury had received enormous inputs and comments in the aftermath of the 2016 budget speech. Questions were responded to without making reference to them, because the answers were overlapping.

Members felt uneasy about being given answers to their questions before they could meet with financial experts to enlighten them more on financial and economic matters. Questions were posed about the framework of the Money Bills Amendment Procedure and Related Matters Act. Answers revolved around the question of fiscal consolidation, the amendment of taxation bill process, transfers of money, unconditional grants, capital investment, the Jobs Fund and debt service costs. Further clarity was sought such issues as the baseline on privatisation and a transfer that had been made with regard to higher education, where the money transferred had come from, the capital shortage in the South African market which could be an impediment to the economy, re-privatisation, and the need to review the Southern African Customs Union (SACU) arrangements.

Meeting report

Opening remarks
The Chairperson remarked that it was always easier to engage with the departments or entities after receiving the technical back-ups from experts or parliamentary advisors or content advisors. The Committee had not had an opportunity to receive the said technical back-ups. Nonetheless, the South African economy ought to be firm in order to serve the national interests. The Committee was expecting the Minister of Finance to be present, because there were enormous invaluable inputs from the public. The meeting had been convened for the National Treasurer to respond to the questions from the Committee’s Members, the public and the Public Benefit Organisation (PBO).  The questions had been posed in terms of section 8(1)-(5) of the Money Bills Amendment Procedure and Related Matters Act 9 of 2009 (the Money Bills Act). Questions had been sent to the National Treasurer two weeks prior to the meeting.

Brief by National Treasury
Mr Lungisa Fuzile: Director General: National Treasury, said that although some questions had been sent for clarity, letters sent in the aftermath of the 2016 Budget Speech had been characterised by positive comments, and this was encouraging. It demonstrated that South Africans understood the economic situation of South Africa and that there was a need to pull it where it was in order to move forward. The responses to the questions would touch on the amendment of the taxation bill process. In answering questions, he would refer to designing tax-related matters, including what the tax laws aimed at achieving or mischiefs that were being addressed.

Mr Fuzile noted that the questions were posed in terms of section 8(1)-(5) of the Money Bills Act. The 2016 Budget Speech was intended to introduce a very strong and fast fiscal consolidation process. Such introduction was done at a slow pace. Fiscal consolidation process was important because it was a process aimed at reducing government deficits and debt accumulation. In line with these changes, projected deficits in each year of the forecast were lower than estimates set out in October 2015. A primary surplus would be achieved in 2016/17. Government was committed to achieving these targets and would take additional steps to do so as conditions warrant. The fiscal consolidation process could not be achieved against a GDP that was smaller and revenue that was lower. It would also be difficult if the GDP, revenue and taxes remained unchanged and at the same level as in October 2015.
Since the Department of Finance presented the fiscal consolidation policy, the economic environment has deteriorated significantly, dragging down South Africa’s GDP growth and revenue projections. Bond yields had increased markedly and the rand exchange rate had depreciated by 14 per cent against the US dollar. Firstly, this deterioration was partly the consequence of a weakening global outlook. Falling commodity prices, increased risk aversion and rising interest rates in developed economies have led to an outflow of capital and a broad pattern of currency depreciation across developing countries.

Secondly, to achieve its fiscal goals, National Treasury proposed to increase revenue through tax policy measures that raised an additional R18.1 billion in 2016/17, and R15 billion in each of the subsequent two years.  It lowered the expenditure ceiling by R10 billion in 2017/18 and R15 billion in 2018/19 by reducing compensation budgets, complemented by measures to restrict hiring. It reprioritised R31.8 billion over the next three years to meet new spending needs, without increasing the total expenditure envelope. In lowering the expenditure ceiling, the government had lost money because if the department or entity traditionally received a huge budget - in the billions - and now received a budget in millions, the ceiling was lowered. As a result, there was a need to trim employment of non-critical personnel, eliminate supernumerary positions and establish a sustainable level of authorised, funded posts that would be closely monitored in the years ahead. The point that the Committee did not miss – but other commentators missed – was compensation budgets of departments with high vacancy rates had been significantly reduced, as had transfers to several national public entities. A commensurate share of the reprioritisation had been sourced from provincial and local government allocations. Some departments or entities had to give up some allocations so that the fiscal consolidation process could be achieved. By just comparing growth rate in expenditure and with the growth rate in GDP, it was possible to see the progress of fiscal consolidation. The gross in GDP ought to be consistently exceeding the rate of growth in expenditure; hence this would cement the fiscal consolidation. 

On the issue of rate of growth and stabilisation, National Treasury made it quite clearly the GDP had to be revised. In the event of slower growth or higher inflation, government ought to reprioritise spending, further reduce baseline allocations or defer new programmes. Government was working with state-owned companies facing financial difficulties to stabilise their balance sheets and implement realistic turnaround plans. For stabilisation purpose, the government would be borrowing money by issuing bonds. These bonds are issued in the domestic currency. A need to borrow was due to citing poor economic growth prospects and other concerns, either downgraded South Africa’s sovereign credit rating for foreign-currency debt or put the country on a negative outlook, raising the possibility of a downgrade to sub-investment grade status. Again, the major problem was depreciation of the South African currency. Over the medium term, the proposed consolidation would stabilise and begin to reduce government’s debt-to-GDP ratio. The depreciation of the rand, however, had increased the stock of foreign debt.

For instance, once the Rand depreciated and converted into a dollar, it was, for the payment of foreign debt, imperative to pay more money in domestic currency. Bonds could be traded on basis of the standardised value or on basis of premium or on basis of discount. In the standardised context, if the bond was R100, it could remain as such if there was no change in the exchange rates. From a premium perspective, the bond could be traded on, for example, 10% of the bond. This implied that whoever had the bond had to trade it at R110. As it is often happened, the bond could be traded at discount. Whoever had the bond could trade it at R20 discount, meaning that the payment would be R80. Put more clearly, bonds were normally bought at a discount (80%) and mature at its nominal value (100%).

Since the ceiling had been introduced, the Department had not breached it. There might be certain circumstances that might compel the Department of Finance to breach, but that would be merely a technical adjustment -- for example, the liquidation of ESKOM.The liquidation was based on the understanding that money would be injected without taxpayers having to pay more.

On the skills development levy, he noted that it had to be passed on as expenditure. In the 2015/16 financial year, skills development had been revised.

On the issue of debt service costs, he said that debts were in a foreign currency. If the exchange rates weakened without anything else changing, the amount that had to be paid increased. When a foreign currency converted to a rand, it became a higher amount.

Mr Fuzile stressed that both Members of the Committee and members of the public should understand the requirement laid down in the Constitution. The debts were a direct charge against the national revenue funds. Once one had agreed as a country that it was right to borrow, at one point in time, the Constitution does not allow the country to defer later on. This was a logical design of the financial system. It needed to be noted that it was necessary to borrow in order to develop infrastructure such as schools, hospitals, roads, etc. The Constitution did not allow the National Treasury to walk away when the interest rate was too high. If the interest rate was too high, the debt service costs would automatically be high. In this situation, some people would ask why a lot of money was being paid.

On the issue of bonds, he said that bonds that had been issued some time ago had matured. From 2017 onwards, the bonds would mature at the value of R80 billion or plus per annum. If one looked where South Africa was; one could see that maturity was lower. The government had approached people whose bonds had matured and made a request for those bonds in exchange for bonds that would mature ten years later. South Africa was among top countries whose bonds had reached the age of maturity. This implied that South Africa had pushed its debts to outer years. This was exceedingly important, because this was what financial experts call refinancing risk. Many countries and business people had found themselves in trouble, not because they were indebted relative to X and Y, but because the structure and design of their debts were problematic. If it happened that there was too much debt maturing at the same time, things could get worse. For example, if South Africa had debts maturing in 2016/17 of R80 billion, and in the same year there was a deficit of R150 billion, the borrowing growth requirement would be too high. That would make a country vulnerable, making it susceptible to market conditions. A switch in debt amounting to R103 billion was not a reduction in debt.

With regard to capital investment, he remarked that capital investment had been lower. There had been no excellent projects that had been executed on time. In such instances, some unspent money was transferred from one municipality to another. There had been no instance where there had been a project under way and money had run out. Some unconditional grants for building schools, for example, had not been used and, in terms of sufficiency principle of resource allocation, more money could not be allocated where money would not be spent. This game could not be played when a decision had been taken to reduce the deficit.

On the Jobs Fund, he commented that when the National Treasury funded a programme it was always optimistic that there would not be unforeseen factors that would inhibit its implementation. It assumed that an entity had the capacity to roll it out. There was a presupposition that within three years, R9 billion would be raised. The Jobs Fund was a matching fund, but matching was not applicable to private companies. Another problem could be that there might be administrative hindrances. Due to the difficulties of raising such an amount within three years, the timeframe had gone beyond three years.

Referring to page 58 of the report, he noted that an amount totalling R10-12 billon had been allocated for the purpose of a re-privatisation process, and certain amounts had been transferred to the Department of Higher Education and the New Development Bank and for the purpose of business development. The re-privatisation process had been split across all spheres of government. The compensation of employees had been reduced, including goods and services at the national level. The provincial and municipal equity share had also been reduced. Included were unconditional grants. The rationale was that unconditional grants were mostly unspent.

Mr Fuzile noted that tax as a percentage of gross domestic product (GDP) had risen over the period that was presented in report. It had been 27% in 2012/13 and would be 27.8% in the 2017/18 financial year. Some adjustment ought to come from expenditure in order to be in line with what the country could afford on a sustainable basis.

The Chairperson requested the Parliamentary researchers to draft a report aligned with section 8(1)-(5) of the Money Bill. Three essential questions that were posed by Members had been responded to in an overlapping manner.

Discussion
Ms T Tobias (ANC) sought clarity on the issue of the baseline on privatisation and the transfer that had been made with regard to higher education, and on where the money transferred had come from. Had it come from unconditional grants?

Mr A Lees (DA) appreciated the balancing of resources and expenditure, and viewed it as phenomenal. He sought clarity on the assumption that all debts were not yet paid, and asked when R20 billion would finally be paid to Eskom. According to the original plan, the debt should have been cleared in December 2015. He sought clarity on the capital shortage in the South African market which could be an impediment to the economy.

Mr Fuzile said that the report showed the spilt between the spheres of government relative to the distribution of re-privatisation. 51% of resources came from national government, 21% came from the provinces and the balance came from local government. Proportionally, provinces got about 43% of nationally raised resources, but contributed less on the revenue. If one looked at the financial trajectory, one may think that it did not make sense. However, the National Treasurer was presenting a picture that it would be spending billions on building infrastructure. There was always room in budgeting for money to be allocated in line with the capacity to spend. Some programmes were characterised by a historical trend of non-spending and such allocations had to be transferred somewhere else where it was needed.

On basis of Fuzile’s response, Ms Tobias remarked that a recommendation should be made in the Annual Performance Plan (APP). It had been reported on several occasions that the APP was not aligned with achievements because of the claim that the National Treasury was not injecting more money. It had transpired that the money that was usually transferred was unspent money, but was not conditional grants.

Mr C de Beer (ANC) agreed. The National Treasury should provide a report on unspent money at the municipal level.

Mr D Maynier (DA), referring on page 54 of the Budget Report, sought clarity on re-privatisation -- in particular, which department, provincial government, local government had been re-prioritised.

Mr Ian Stuart, Chief Director: Fiscal Policy, National Treasury, responded that on page 34 there was a consolidated budget per capital and current expenditure. The capital financing did not declare the share of GDP to be consistent. There were some reductions at the national and provincial level relative to unconditional grants, and capital financing remained unchanged. Public investment remained significant for the next three years.
           
The Chairperson sought clarity on the infrastructure expenditure.

Mr Stuart responded that the infrastructure spend was a lower percentage of the GDP, which had been envisaged in the National Development Plan. The way one read the 10% was actually an aspiration. It was slightly different from the way the National Treasury wanted the GDP to expand. It was important to know that the budget did not work in terms of ratios, because ratios only signalled things. The major issue was to ensure that capacity was built to such a degree that it could drive economic growth efficiently.

Dr B Khoza (ANC) sought clarity on fiscal policy. She expressed her concern about the revenue from taxation, in particular international trade and transactions relative to what the government was paying to the Southern African Customs Union (SACU). This could lead to a review of the SACU arrangements. Here, the government had revenue of R46 billion from international trade and transactions, but such revenue had been immediately wiped off completely by the payment made to the SACU. She sought clarity on the terminology that had been used at the first time by COSATU, namely “economy outsourcing.” Economy outsourcing was challenging South Africa. The issues that had been raised should be explored very closely. South Africa ought to survive as a country. Was it possible to review the SACU arrangements, because they were aggravating South Africa’s economic crisis?

Mr De Beer and the Chairperson seconded Dr Khoza on the issue of reviewing the SACU arrangements. The Chairperson added that the matter should be tabled before Parliament, and find out how much could be rescued.

Mr Fuzile noted that R3 billion had been transferred already and there had been a discussion with Eskom. The idea was to finalise the matter so that it would not affect the fragile economy. It was an issue related to outer projections, which were based simply on assumptions. If the first year was depressed, the second year would have a lower base effect. In real terms, this would not give an actual adjustment.

The Chairperson asked Mr Fuzile to respond to the questions that had been posed by the Public Benefit Organisation (PBO) and COSATU.

Mr Fuzile responded that all questions had been responded to, so his answers were overlapping. There was an issue over fiscal consolidation and how ratio in the GDP was, compared to other societies. The comparisons were always murky because economic circumstances differed from one country to another and tended to differ on a consolidated basis. Some countries might have high taxation or a high social security system. The ratios that were taken on their own could not reflect a picture that was good enough for comparison purposes. 

If one looked at value added tax (VAT), some had argued that it should be increased whereas others had argued that it had raised too much money for government. Some suggested that luxuries should be taxed more. Some goods constituted a high proportion of a consumption basket for poor households. Some goods – such as loaf of bread – were consumed by both the poor and the rich. The taxation system might allow taxation of goods and services for luxuries, and this issue might be explored further. For the purpose of taxing well and in connection with social solidarity, the issue of increasing transfer duty had been considered. People who might be able to pay much money, for example, paying R10 million for a house, should be taxed more. However, the difficulty in taxing wealth could not be ignored. It was not always that wealth generated a cash flow. The tax system was designed to tax the transfer of wealth or the cashing of wealth in the form of liquidation. All taxes could be adjusted in one way or another, depending on one taking due care of economic circumstances. Earmarked taxes were not good.

The meeting was adjourned.

 

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